Metro cities reap savings from improved credit ratings

Falcon Heights is a community of just 5,400 people. Like other small cities, it’s historically had to pay more than larger cities whenever it borrowed money. The city got a big boost last year, though, when it went to borrow $715,000 to buy a fire truck. Standard & Poor’s gave it a coveted AAA rating, the best possible score and higher than the AA range that had been expected. The rating saved Falcon Heights taxpayers $22,000 in interest payments on the new fire truck.

“I have to say, I was rather surprised,” said City Administrator Bart Fischer.

As with Falcon Heights, communities across the Twin Cities are benefitting from a strong regional economy, good governance and new methodologies that credit rating agencies use to determine the risk of local government bonds.

Standard & Poor’s doesn’t expect to have a final count of Minnesota ratings changes under the new methodology until mid-September, said Alex Ortolani, a communications manager for the ratings agency. In addition, any changes since that time aren’t necessarily just because of the new formula since other factors may be at play.

Even so, Twin Cities communities are faring well so far. A Finance & Commerce tally didn’t find any downgrades among the 58 cities with more than 5,000 people that have S&P ratings in the seven-county metro. Meanwhile, at least 14 either saw credit rating upgrades or were assigned S&P’s AAA rating for the first time, as with Apple Valley, Eden Prairie and Falcon Heights.

Moody’s announced its own revised formula in January but it only selected 14 local governments for review statewide: four cities, five counties, four school districts and the Dakota Communications Center, said David Jacobson, a Moody’s spokesman.

Apple Valley was under review for a possible downgrade but nonetheless held on to its Aaa rating. Bayport and Elko New Market each received upgrades from A1 to Aa3 — moving their debt from medium grade to high grade.

Golden Valley, which dropped from Aaa to Aa1, was the only city that Moody’s downgraded. The rating agency cited the city’s built-out tax base that limits future growth, above-average debt and a small number of taxpayers accounting for a disproportionate share of the tax base.

(Moody’s downgraded Minneapolis’ AAA rating to Aa1 in July 2013, before the new methodology was announced. Vadnais Heights was downgraded by Moody’s and S&P the year before.)

Managing risk

Credit ratings are a measure of how risky it is for investors to lend money to a borrower. The ratings for local governments determine how much cities, counties, townships and associated entities have to pay when they issue bonds and take on other types of debt. Good credit ratings save taxpayers money.

S&P and Moody’s changed the way they evaluated local governments in order to increase transparency and eliminate biases in ratings offices and among analysts, said Mark Ruff, a senior financial analyst with Ehlers Investment Partners, which provides financial planning for numerous Minnesota cities.

Under the old system, small cities like Falcon Heights had a hard time earning a AAA rating. But the rules now reward the inner-ring suburb for its long-term fiscal strength and stability — particularly after exurban areas’ bets on high growth failed to pay off, he said.

Twin Cities local governments also benefit from the strong local economy, Ruff said. The state’s gross domestic product grew 2.8 percent in 2013 compared to 1.9 percent for the country as a whole, according to a June report from BMO Capital Markets Economic Research. It’s expected to see 2.5 percent growth in 2014 compared to the 2.2 percent forecasted national rate.

“The Minneapolis-St. Paul area is viewed as pretty healthy compared to the rest of the nation,” he said.

“We work in several states, and I would say Minnesota is among the strongest,” Ruff said.

Micro not macro

Individual communities are quick to note their own specific characteristics, though.

Lake Elmo, which moved up a notch from AA to AA+ in June, has several characteristics that suggest a strong ability to pay off bonds — including a small debt load, solid demographics and good housing prices, said City Administrator Dean Zuleger. It also formalized financial policies, such as requiring new development to pay for itself.

Zuleger thinks the upgrade would save Lake Elmo 80 to 100 basis points if the city refinanced.

Lake Elmo is one of several highly rated communities that have reserves well above what the state auditor recommends. The city’s reserves have hovered between 65 and 70 percent. Falcon Heights is at about 75 percent. Apple Valley is at 50 percent and directs anything above that to a fund for future capital expenses.

Fischer, the Falcon Heights city administrator, noted that it takes a history of good decisions to build up a financially strong city.

Apple Valley Mayor Mary Hamann-Roland has aimed for AAA status since she was elected 16 years ago. The city got its first of four upgrades in 2001 and earned Moody’s Aaa rating by 2010.

Apple Valley was one of 124 cities nationally that Moody’s reviewed for a possible downgrade in conjunction with the release of its new methodology. But city officials responded by inviting two Moody’s analysts from Chicago to tour Apple Valley and learn more about its story.

In April, the agency announced that Apple Valley would retain its Aaa rating. With the AAA S&P rating awarded the month before, Apple Valley became one of just 10 Minnesota cities to have a dual AAA rating. Those high marks wound up saving an estimated $52,000 in interest payments when the city borrowed $9.7 million for a water treatment plant expansion.

“We knew that it was incumbent on us to share with them all of these pieces of our well-managed city,” Hamann-Roland said. “When your bond rating is exceptional like ours, it has its advantages. It’s a business decision.”

[HD] Standard & Poor’s Twin Cities credit rating changes

The following cities are known to have received ratings upgrades or new AAA ratings since Standard & Poor’s announced a new methodology for rating local governments in September. Finance & Commerce only looked at cities with at least 5,000 people in the seven-county metro.